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Platform Models for Sustainable Internet Regulation
kc claffy and David D. [email protected] and
[email protected]
August 15, 2013
Abstract
The dynamic nature of the telecommunications industry, with its
rapidly changing tech-nology and industry structure, presents a
serious challenge to the theory and practice of reg-ulation, which
has a slower time scale and a tendency to embed assumptions about
technol-ogy and industry into regulation. This paper proposes a
model that attempts to capture twodurable and persistent features
of today’s telecommunications ecosystem: the use of
layeredplatforms to implement desired functionality; and
interconnection between actors at differentplatform layers. We use
platform theory, and in particular theories of multi-sided
platforms(MSPs), to focus on key technical and business aspects of
today’s industry. We use an MSP-aware layered model of the
ecosystem to explore several recent and impending innovations inthe
ecosystem that have been naively conflated with the global
Internet, illuminate their dif-ferences, and describe how
regulators could use our model to more rigorously consider
them.Finally, to illustrate its potential as a baseline for future
research, we briefly consider how thismodel can help scope
consistent policy discourse of three open questions: specialized
services,minimum quality regulations (“the dirt road” problem), and
structural separation.
1 Introduction
A significant challenge in developing regulatory theory to
support communications policy is thehighly dynamic technology and
business practices in the evolving Internet. Traditional
regula-tory theory in the telecommunications sector relied on
simple conceptions of technology, such ascopper pairs carrying
telephone service to homes. Innovative uses of that copper pair
(e.g. DSL)and advanced technologies such as hybrid fiber-coax
(HFC), fiber and wireless, have led to defini-tional confusion,
litigation, and a dauntingly complex, poorly understood networked
ecosystem.Recent trends toward convergence of virtually all
communications services using the Internet Pro-tocol (IP), both in
public and private networks, render the complexity and ambiguity
even worse.
The goal of this paper is to present a model of communications
technology and industry prac-tice that is general enough to survive
current rates of innovation and evolution, and stable enoughto
support relevant regulatory theory. We draw on two fundamental
elements of today’s telecom-munications ecosystem: the use of
layered platforms to implement functionality desired by eitherusers
or providers; and interconnection between actors at different
platform layers to construct alarger fabric. The concepts of
platforms, layering, and interconnection are not new; but our
modelcombines them in a way that captures both stable and dynamic
aspects of the technology andbusiness practices of the ecosystem,
while abstracting away details that confuse more than clarifyto
regulatory debates.
Section 2 describes a taxonomy of platforms classified across
two dimensions: how they areconstructed (one or multiple firms) and
how they are used (only by the platform owners or by
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others). The Internet and its larger ecosystem is actually many
layers of platforms that span allfour combinations of these two
dimensions. We augment this classification with a
well-acceptedmodel of contemporary interconnection patterns among
ISPs, and find that the resulting picturebrings some clarity to
differences among several recent Internet-related service offerings
and theirregulatory implications. The highly dynamic nature of the
industry implies that technical detailsof various platform layers
will change faster than regulatory debate can possibly resolve, but
ourtwo-dimensional platform matrix allow reasoning that is
independent of these technical details:whether they are internal or
industry platforms, and whether they are single or multi-firm
plat-forms. Equipped with this taxonomy, we discuss two platform
layers of the ecosystem that seemparticularly durable: the global
Internet and the single-firm IP platform. A third emerging
plat-form innovation – the multi-firm IP platform – is likely to
also become common, which raisessignificant challenges for
regulators. Section 3 explores how a platform-aware model can
usefullydistinguish among services running on different IP-based
platforms, as well as the possible behav-ior of those platform
owners, in a way that offers a cleaner derivation and clearer
interpretation oftheir regulatory implications. Our underlying
premise is that regulation attached to stable layersis likely to be
more durable, and Section 4 considers how the framework of
platforms we havedeveloped can help scope consistent policy and
regulation of the Internet. We study three pol-icy questions of
interest in a platform context: specialized services, minimum
quality regulations(“the dirt road” problem), and structural
separation Section 5 offer some concluding thoughts andsuggests
future directions of research and debate.
2 Platforms: their nature and layered structure in the
Internet
A platform is a technology providing a set of service
capabilities on top of which many differentproducts can be
developed and deployed. Operating systems (e.g., Microsoft Windows,
iOS, An-droid) are platforms – they support a wide range of
applications and services, often provided bymany third-party
providers. The owner of a successful platform may acquire powerful
advan-tages in the related industrial ecosystem. Factors that
influence the ability to create and control asuccessful platform
include the dynamics of gaining and holding market share, network
external-ities and control of intellectual property.
In the context of industrial structure, Gawer [12] described
three classes of platform: internal,supply chain and industry.
Internal platforms are developed and exploited internal to a firm
toreduce cost and improve flexibility and time to market for
product development. Examples ofinternal platforms are often found
in manufacturing industries such as automotive and
electronics.Supply chain platforms are produced and exploited by a
set of firms, linked in collaborations andalliances. An industry
platform is produced by one or a set of firms and then made
available toother entities (complementors) to develop products on
top of that platform.
To clarify their role in our model, Figure 1 depicts four types
of platforms (and examples ofeach) along two dimensions:
construction and use. The upper row corresponds to Gawer’s
in-dustry platform, although we distinguish between those
constructed by one vs. multiple firms.The right column generalizes
Gawer’s supply chain platform to a multi-firm platform, to
includecases where firms are peers or partners. Gawer’s analysis
still applies to multi-firm platforms,i.e., relationships among
firms producing the platform influence which firms may have
sufficientmarket power to define and regulate the platform, or even
destabilize it in the process of trying tomaximize profit.
2
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Figure 1: Two important aspects of a platform: how it is
con-structed and who its users are. The global Internet is an
ex-ample of an external or industry platform produced by manyfirms.
The upper left box (an industry platform produced byone firm) is
not common in the Internet context, but we pre-dict it will become
more common in the future, with profoundimplications for any theory
of broadband regulation.
For example, Microsoft Windows is an in-dustry platform, defined
and developed bya single firm that controls it through
intel-lectual property licensing and other meth-ods to limit
appropriation of the platformby competitors. The Internet as we
knowit today is a multi-firm industry platform,constructed by
multiple firms interconnect-ing their networked assets based on
(mostly)open standards. One of the most successfulindustry
platforms in history as measured bythe range of innovative
applications built bycomplementors using it, the Internet and
itslarger ecosystem is actually many layers ofplatforms that span
all four quadrants of Fig-ure 1.
The Web is also a multi-firm platform,implemented at a layer
above the basic In-ternet transport capability, and applications
using this higher-level web platform can themselvesserve as a
platforms for other application developers. The Web, like the
Internet, is defined bystandards, mostly set by the World Wide Web
Consortium (W3C) hosted at MIT, with many ac-tors involved in both
setting the standards and implementing them in web servers and
browsers.On top of the Web platform one can find further examples
of platforms. Facebook is a single-firmindustry platform for
complementors who build on top of it. In contrast to the Web
platform,which is largely characterized by open standards, the
Facebook platform is dictated by its owner,shaped only by any
pressures from their complementors and users that they choose to
respect.While there have been fears that a powerful player might
try to distort a web standard using themarket share of their
browser, the need for interoperability among tools (firms) seems to
haveprevented serious fragmentation of the Web standards.1
The repeating platform structure of the Internet also appears
below the network layer, down tothe physical layer of routers and
fibers. Internet service providers provision routers and fiber in
or-der to build and maintain their parts of the Internet. But these
technologies also enable individualproviders to construct a stack
of internal platforms to support a range of services by the firm,
or tocreate additional industry platforms for complementors. In
network architecture language, theserepeating layers may multiplex,
i.e., simultaneously support, many higher-level services.
Longdistance fibers are multiplexed by using different colors of
light (lambdas) to carry different datastreams. These data streams
are often multiplexed using a technology called Multi-Protocol
LabelSwitching (MPLS), which breaks the data stream into packets.
The most common format for thesepackets is the Internet Protocol
(IP), which results in an IP-based platform. From the perspectiveof
each ISP, their IP platform is a single-firm platform, while the
Internet is a multi-firm platformthat happens to use the same
protocol. At the same time, lower layers can serve as both an
internalplatform and an industry platform, i.e., the owner of a
fiber infrastructure can both use internallyand sell to others a
fiber, a lambda, a share of an MPLS service, a range of IP-based
services, oraccess to the public Internet.
1For a range of commentary on powerful actors manipulating key
web standards, see for
examplehttp://www.internetnews.com/dev-news/article.php/83051/Web+Standards+Group+Criticizes+IE+5.htm
(1999)
orhttp://developers.slashdot.org/story/12/08/10/2152236/microsoft-picks-another-web-standards-fight
(2012).
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N+1$ N+1$
Pla(orm$layer$N$
Lower$pla(orm$layer$N11$
Industry$pla(orm$
Internal$pla(orm$
Complementor$services$
Higher1level$internal$services$$
Lower$layer$
internal$pla(orm$
(a) Platforms sitting on lower layer platforms that can
provideboth an industry and internal platform to services
above.
Lambdas'
Fibers'
MPLS'
Single2firm'IP'pla6orm'
Global'Internet'
“The'web”'
Facebook'
VoIP' IPTV'
(b) In the Internet ecosystem, fiber owners may be able to
cre-ate multiple platform layers, each one serving as an
industryplatform as well as an internal platform for the
development ofhigher-level services.
Figure 2: Illustration of platform layers and their role in the
Internet ecosystem
The significance of these layers inspire the repeating platform
layer dimension of our model.Figure 2(a) illustrates how each layer
sits on a lower-layer platform that supports a range of in-ternal
as well as complementor services; Figure 2(b) instantiates an
example set of such platformlayers in the Internet ecosystem.
Layered models have been used for at least a decade to explainthe
structure of network technology, and to reason about regulatory
treatment [19, 23, 24]. Morerecently, Jordan [15] argued that a
critical demarcation point is between the Internet Protocol
layer(and below) and those layers above the Internet layer (the
application or complementor layers).He believes this delineation
would not only recover some meaning to the telecommunications vs.
in-formation service terminology in the U.S. Telecommunications
Act, but would promote innovationat higher layers in the industry
by limiting regulation to the lower layers to prevent vertical
fore-closure. Our model differs from his in that we articulate the
distinction between the multi-firmindustry Internet platform and
the IP platform below the Internet; our goal is to avoid
simplifica-tions that mask aspects of layering that are relevant to
regulatory analysis.
One of our objectives is to identify specific platform layers
that are likely to be stable over time,because we argue that stable
layers should be the focus of regulatory attention. The physical
layerin this repeating layering has a durable character; its
creation is typically capital-intensive and itsevolution
constrained accordingly. However, technology evolution and dynamism
bring tremen-dous variability to the intermediate lower layers of
this stack, resulting in different intermediateplatforms, so any
attempt to attach regulatory burdens to a specific technical
implementation ofa layer runs the risk of rapid irrelevance. For
example, in contrast to the MPLS in Figure 2(b),the HFC
infrastructure of a modern cable access system implements
multiplexing using platformlayers based on 6Mhz channel allocations
and a protocol called DOCSIS. Historically contingentdetails of
this cascade of platforms will not matter to a general and durable
model. In particular,a durable model will be able to identify key
features that merit different regulatory treatment ofdifferent
layers, regardless of the technical details of a given layer at a
given time. Such a modelwill be particularly helpful in the
analysis of imminent, economically inevitable platform innova-tions
about to shatter our already cracking models of communication
regulation. The first suchinnovation we explore is the “single-firm
converged IP platform”, often naively conflated with thepublic
Internet.
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2.1 The single-firm IP platform
Most Internet Service Providers have historically provided many
services in addition to the publicInternet. These services, such as
telephone and cable television, create additional revenue
oppor-tunities, perhaps with higher margins than classic Internet
service. Today, a common technicalapproach to providing these other
services is for a firm to build a single-firm IP platform, a
con-verged service layer based on the Internet protocols (IP), over
which the infrastructure owner canoffer its own voice (VoIP) or
video (IPTV) services, as well as to provide an industry platform
suchas the public Internet. The use of the single-firm IP platform
can support enhanced service quali-ties (e.g., QoS) that may not be
permitted on the Internet platform, due to regulatory
restrictions.The term converged captures the idea that this layer
brings together disparate lower-level technolo-gies under one
service interface. The IP platform is a particularly powerful and
successful servicebecause the Internet protocols were designed to
support exactly such an objective: to provide alayer that
implements a uniform service interface on top of a variety of lower
level technologiesand platform interfaces.
This new reality changes the context for reasoning about the
role and necessity of regulation.Under the assumption that the
major purpose of the IP platform was to implement the public
In-ternet, regulatory proposals that tried to constrain the
relationship between the ISP and the com-plementors (e.g., ”network
neutrality” regulations) considered only the industry platform
thatprovided the global Internet. Proponents of network neutrality
(or ”reasonable network man-agement,” as the FCC has termed it
[8]), are concerned with the potential chilling effect on
com-plementors if the Internet provider favored (in pricing or
performance) their own higher-levelservices over products and
services from complementors. But the regulatory proposition is
morecomplex if the owner of the single-firm IP platform can also
sell consumer-facing services on topof this internal platform
instead of or as well as the global Internet.
Global&interconnected&Internet&
Comcast&single3firm&IP&pla7orm&
AS&
The&Web&
Xbox&TV&
OTT&TV&
Figure 3: Delivery of Comcast Xfinity video over their
con-verged IP platform, in contrast to over the top (OTT)
videobeing delivered by competitors over the Internet.
We cannot easily dismiss these multipleuses of the single-firm
IP platform, since theymay be the only way to recover the costsof
operating the underlying infrastructure ina competitive market. For
example, accessISPs today offer what is sometimes calledthe triple
play over their access technology –voice, video and Internet;
revenues from allof these services cover the costs of the
infras-tructure.2
As an example of a service offered overa single-firm IP
platform, Comcast recentlyintroduced the Xfinity Xbox IPTV
service,which carries on-demand television content over IP to a
customer’s Xbox for display on an at-tached monitor television
(Figure 3) [16]. Comcast described this service as a
consumer-facingservice running on top of their single-firm IP
platform, not the public Internet platform, and thusasserted that
it was not covered by the obligations against discrimination
imposed by the FCC’sOpen Internet Report and Order. Therefore they
exempted the usage attributed to this servicefrom the monthly quota
on their Internet service. Critics argued that the Xfinity Xbox
serviceshould be viewed as operating on the global Internet
platform, and therefore Comcast should(under the Open Internet
Report and Order) treat it equally to other video services and
include it
2The FCC concurred with this assessment of the economics of
broadband access in their ruling on local franchisingof cable
competitors [7, para 51].
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Single'firm+IP+pla0orm+
Global+Internet+
Xbox+TV+
DOCSIS+
Cable+channels+
Tradi@onal+digital+Cable+TV+
Today+
Single'firm+IP+pla0orm+
Global+Internet+
Xbox+TV+
DOCSIS+
Cable+channels+
IP'based+TV+
Future+
AS+
AS+
Figure 4: Most cable TV providers will migrate TV onto their
single-firm converged IP platform. No IPinteroperation (i.e. over a
multi-firm platform) is required to deliver IPTV.
in the cap.3
This debate will intensify as all of cable television service
will eventually move to this single-firm IP platform layer model,
i.e., TV will become IPTV (figure 4), which does not imply it is
run-ning as just another application on the global Internet. New
services can be expected to emerge aswell–services that have no
prior regulatory history as cable TV and telephony do. A challenge
forregulators is to assess the implications, both positive and
negative, of the emergence of consumer-facing services offered by
facilities owners over their single-firm (internal) IP
platform.
Further complicating the analysis, a firm could convert their
internal platform to an external(industry) platform, by allowing
complementors access (i.e., direct interconnection) to this
plat-form (thus moving from the lower left to the upper left
quadrant of the matrix in Figure 1). Thispossibility reveals a
fundamental question: if both the single-firm IP platform and the
global In-ternet are supporting complementors, perhaps some of the
same complementors, in what respectsare they different platforms?
Alternatively, two firms might agree to interconnect their internal
IPplatforms for a specific purpose, shifting along the other
dimension of the platform matrix (fromthe lower left to the lower
right quadrant of Figure 1).
Before we explore the implications of these two types of
interconnection, we summarize thefour important aspects of the
ecosystem our model has captured this far. First, the ecosystemhas
many layers, sometimes recursive (IP on top of another IP layer),
and with technical detailsthat change rapidly enough that a stable
and general model of regulation will have to ignorethese technical
details. Second, one can reason independent of these technical
details by firstcharacterizing platforms along the two dimensions
in our matrix: whether they are internal orindustry platforms, and
whether they are single or multi-firm platforms. Third, the
emergingsingle-firm IP platform is likely to be stable and
persistent, which means our model has at leasttwo durable layers:
the global Internet and the single-firm IP platform. Fourth, we
anticipate theemergence of a third stable platform in the IP
ecosystem: a multi-firm IP platform, which mayserve both as an
industry or an internal platform. We next examine issues related to
such multi-
3For one perspective on this debate see
http://gigaom.com/2012/03/27/the-technical-and-legal-realities-of-comcasts-xbox-cap-spat/
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Tier%1%provider%
Tier%1%provider%
Tier%1%provider%
Tier%2%ISP%
Smaller%ISP%
Smaller%ISP%
Smaller%ISP%
Smaller%ISP%
Smaller%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Transit%
Peering%
(a) Physical representation of Internet interconnection.
Tier%1%provider%
Tier%1%provider%
Tier%1%provider%
Tier%2%ISP%
Smaller%ISP%
Smaller%ISP%
Smaller%ISP%
Smaller%ISP%
Smaller%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Tier%2%ISP%
Transit%Peering%
CDN%
(b) The addition of a content delivery network (CDN) to themix
of interconnections.
Figure 5: Both the multi-firm production of the global Internet
and the interconnection of complementorssuch as CDNs may manifest
as physical links in a diagram of the Internet.
firm platforms, of which the Internet itself is the most
recognized one.
2.2 From single-firm platform to multi-firm platform
We have described the global Internet as an industry platform
composed of an interconnectedmesh of many single-firm IP platforms.
Interconnection is the process, evolving for the last
severaldecades, of building a multi-firm platform out of the
single-firm IP platform of each ISP.
Internet interconnection patterns have evolved over the past
decades. In the past, while mosttraffic used to travel up to a Tier
1 provider on its way to its destination, over the years
moretraffic began to pass over a dense mesh of Tier 2 ISPs rather
than transiting major Tier 1 providers.Figure 5(a) illustrates the
resulting mesh of Tier 2 peering. The more interesting recent
evolution,from the perspective of this paper, is the emergence of
large content delivery networks (CDNs),which attach to the various
regions of the Internet to facilitate the efficient delivery of
content, asillustrated in Figure 5(b). This figure emphasizes the
physical topology of interconnection, notdistinguishing CDNs from
ISPs in terms of their role in the ecosystem.
Illustrating interconnection in terms of layers of platforms, as
in Figure 6(a), clarifies this dis-tinction. In this figure,
content delivery networks operate at a layer above the global
Internetplatform, because their role in the ecosystem is not
general interconnection among firms that con-stitute the global
Internet, but rather as a service to content providers. A CDN is a
complementorof the ISP platforms to which it connects, as well as
being another platform in its own right, actingas a delivery
enhancement mechanism for a range of higher-level services.
Content-related com-plementors (e.g. a Content Delivery Network or
CDN and its customers) are superficially similarto ISPs: they have
AS numbers, interconnect with other ISPs, etc. But interconnection
between aCDN and a broadband access provider crosses platform
layers, between complementor and In-ternet. In other words, some
physical interconnection involves the construction of the
multi-firmplatform, and some interconnection represents a use of
that platform.
Spulber and Yoo [22] identify five sorts of interconnection that
can be found in the Internet:retail (our end-users), wholesale,
interconnection (our multi-firm production of the Internet
plat-form), platform (the compementors) and unbundled access
(unbundling at the physical layer).They stress the difference
between the retail and platform interconnection, although they
discussthe platform interconnection mostly in terms of access to
TCP/IP, rather than as physical intercon-nection. They recognize,
as we stress, that two sets of links may be identical in terms of
physical
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Converged)IP)pla/orm)
AS)
Global)interconnected)Internet)
Converged)IP)pla/orm)
AS)
The)Web) Content)delivery)network)
Firm)1) Firm)2)
Converged)IP)pla/orm)
AS)
Firm)3)
(a) Platform model of the multi-firm Internet, created by
in-terconnecting Autonomous Systems (ASes), i.e., parts of
theglobal Internet operated by one firm.
Single'firm+IP+pla0orm+
AS+
Global+interconnected+Internet+
Interconnected+VoIP+
Single'firm+IP+pla0orm+
AS+Private+IP+ Private+IP+
Global+private+IP+network+
The+Web+
Firm+1+ Firm+2+
(b) Both the global Internet and a multi-firm internal IP
net-work built by interconnecting the platforms of multiple
firms.
Figure 6: The converged IP platform supports two global
platforms: (a) the public Internet and (b) a privateIP network.
Lines in (b) represent physical interconnections as well as
connections between platform layers.
properties but different in terms of the economic relationships.
The paper presents an economicanalysis of the implications of using
regulation to manage each of these forms of interconnection.
2.3 Alternative multi-firm IP platforms
A more recent development in this evolutionary trajectory is
that firms that have built the multi-firm global Internet by
interconnecting their single firm platforms may replicate this
approach toproduce other multi-firm IP (but not Internet)
platforms. The initial role seen in practice for sucha network is
as an internal platform, serving the firms that create it. For
example, some firmsthat offer VoIP are now creating a second
connected mesh of private IP services over which tointerconnect
VoIP calls. Figure 6(b) illustrates the creation of both the global
Internet (an industryplatform) and a multi-firm internal IP
platform by the interconnection of single-firm platformsacross
multiple firms. Just as a single-firm IP platform can serve as an
industry platform as wellas an internal platform, a multi-firm IP
platform could be offered as an industry platform to
com-plementors. Such an interconnected IP platform would be an
alternative (to the Internet) industryplatform for third-party
complementors to reach consumers instead of the current global
Internet,perhaps offering better quality of service or security. An
infrastructure provider might marketsuch a platform to large
application providers such as Facebook as a more effective way to
reachconsumers, e.g., see figure 7. As with single-firm IP
platforms, the inevitable question for theregulator is how to view
companies building, interconnecting, and selling services on their
ownprivate IP-based platforms, logically if not physically separate
from the global Internet platform.
The FCC’s Open Internet Report and Order [8] generates some
urgency to this question ofwhen an alternative service offering is
similar enough to the global Internet that it should berequired to
comply with the order. The current view expressed (although perhaps
not clearly)in this report is that the answer depends on the reach
and character of the alternative service: ifit reaches essentially
as far as the public Internet, then it should comply with the
Order, whichwould impose rules about discrimination and blocking
[8, para. 47,112]. However, the multi-firm IP platform that carries
VoIP services for the facilities owner (e.g., it is currently an
internalplatform) will likely end up with a global scope, and is
not currently subject to neutrality rules. Itis not clear why reach
is the correct criterion for regulatory classification of a
service.
In this section we have mapped various IP-based platforms into
our matrix of options for thecreation and exploitation of
platforms. We have shown examples of an IP platform in each of
thefour quadrants, and explained how a platform-aware understanding
of interconnection can shed
8
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light on otherwise confusing innovations in the ecosystem. Next
we introduce another relevantaspect of platform theory that is
essential to understanding the economics of today’s
Internetinfrastructure: the multi-sided platform, or MSP.
2.4 Multi-sided platforms (MSPs)
Single'firm+IP+pla0orm+
Public+Internet+
Global+interconnected+Internet+
Single'firm+IP+pla0orm+
Public+Internet+Private+IP+ Private+IP+
Mul:'firm+IP+network+
The+Web+
Firm+1+ Firm+2+
The+Web+
Facebook+
“open”+non'
discriminatory+pla0orm+
Private+pla0orm+
with+op:on+for+discrimina:on.+
Improved+service+
Figure 7: Both the global Internet and a multi-firm IP net-work
acting as alternative industry platforms for consumer-facing
services.
A Multi-Sided Platform (MSP) is a specialcase of a multi-sided
market. A multi-sidedmarket is a circumstance in which a
providerhas several classes of mutually dependentparticipants.
Hagiu [14] provides a discus-sion of different definitions of MSPs.
He alsofollows the tradition of using the term cus-tomers to
describe the classes that are associ-ated with the market. However
we will usethe term participant to stress the point that theclasses
of participants that associate with theprovider of the market may
not all be pay-ing to use the platform. The classic exam-ple of a
multi-sided market is a dating club,where both men and women must
attend forthe club to be successful, and a club owner might offer
men and women different prices to enticethem both to come, because
of a perception that men and women would attach different values
tothe experience. An MSP, by analogy, is a platform that requires
several classes of participants topartake in order for the platform
to be successful.
By this definition, the global Internet is an MSP, with retail
users as one class of participantsand complementors as another.
Complementors may participate in a number of ways: provid-ing
software, web content, gaming, music sharing, or other services.
Complementors and usersare mutually dependent; for any activity
involving both classes, there is a balance between theirroles.
Wikipedia is a complementor on the global Internet platform that
provides a service (itselfa single-firm industry platform) to
enable users (contributors) to produce value. For peer-to-peerfile
sharing, the complementor only produces and perhaps maintains the
sharing software, andusers create value by using it. For commercial
content creation and distribution, the user is asomewhat passive
consumer and the complementor drives production.
While the global Internet taken as a whole is arguably an MSP,
from both a business and regu-latory perspective the unit of
concern is usually the firm (or a class of firms, like broadband
accessproviders), not a multi-firm platform. This distinction
raises the question of whether it is legiti-mate to view an
individual firm as an MSP. According to Hagiu’s definition [14], an
MSP’s classesof participants must have a direct association with
the platform provider. Historically, a comple-mentor attached to
the Internet at one or a few points, but served all users on the
Internet fromthose points. Most access ISPs transited packets to
and from their peers, but did not have explicitrelationships or
even necessarily know about any complementors. Even today, most
complemen-tors who provide services using network-attached servers
(e.g. Web servers or game servers) payto attach to the Internet,
but since much of the Internet interconnects via revenue-neutral
peering,no revenues from complementors flow into the access ISP.
Retail consumers of broadband access(“eyeballs”) cover the entire
costs of the access ISP.
This oversimplified description of the Internet would not
classify most individual access ISPsas MSPs, since the
complementors as a class of participants do not have a direct
association with
9
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the access ISP. There are some exceptions to this case, of
course. For example, ISPs that provideWi-Fi hot spot access for
free, financed by advertising revenues, seem like MSPs, with users
andadvertisers forming the two classes of participants. But with
respect to complementors as a classof participants, an explicit
association between complementors and access ISPs is
increasinglycommon today, moving individual access ISPs toward an
MSP role in the ecosystem. Most no-tably, large content providers
such as Netflix and Google, as well as CDNs that serve content
onbehalf of many other content providers, often negotiate business
relationships that result in di-rect interconnection to access
ISPs, as illustrated in Figure 5(b). As another example of a
directassociation between access ISP and complementor, HBOgo (the
Internet version of HBO) relies onthe access ISP to verify that a
specific user has the right access credentials based on that
customeralso subscribing to HBO via their cable TV service. ESPN
requires that access ISPs pay a fee toESPN in order that its users
have access to the Internet ESPN service, called ESPN3. As
describedin Section 2.2, physical interconnection can reflect
either the production of the multi-firm Internetplatform or the
connection of a complementor to an IP platform; supporting this
latter type ofinterconnection turns an access ISP into an MSP.
3 Regulatory implications of a multi-sided platform model
Analyses of multi-sided markets usually focus on differential
pricing [17], but much of the con-cern today with regulation of
access ISPs relates to other forms of discriminatory behavior,
e.g.,blocking or variable quality of delivery of content from
complementors. In an analysis of regula-tory implications of MSP
behavior, Evans [10] concludes that a potential regulator must be
cau-tious about determining predatory pricing in an MSP, as the
price on one side may be efficientlyset above or below cost, as
part of the overall pricing analysis. Generalizing Evans’
argumentsuggests that not just pricing but all forms of potential
discrimination should be evaluated withregard to all classes of
participants. Several researchers have explicitly argued that
certain formsof discrimination can enhance the overall health of an
MSP [9, 13, 2].
For example, the Apple app store (a single-firm industry
platform) is an MSP, with two classesof participants: the
application designers and the purchasers. Apple discriminates among
applica-tions (the complementors). While this business strategy may
restrict competition and innovationat the level of the
complementors, a thorough MSP analysis should examine the impacts
on allplatform participants. Discrimination with respect to
applications arguably makes the platformmore attractive to users,
by giving them confidence that undesirable or risky applications
havebeen removed from the system. This outcome might in turn
increase market share and makethe platform more attractive to
complementors. (Note the large difference between an MSP
exer-cising some degree of discrimination with respect to a
complementor class and a powerful MSPblocking a popular
application, perhaps as an exercise in rent-seeking or protection
of a verticallyintegrated competitor. Apple removed the Google maps
app from the iPhone in favor of their ownmaps, triggering a
significant consumer backlash.)
In the remainder of this section we explore how multi-sided
platform theory would influencediscourse on different types of
discrimination by platform owners against complementors andretail
users.
3.1 Discrimination with respect to Internet complementors
Analysis of the consequences of a particular form of
discrimination will depend on the higher-level goal that drives the
call for non-discrimination. Why are advocates and regulators
con-
10
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cerned about non-discrimination on the Internet? One goal is
fostering innovation, i.e., non-discriminatory access protects
complementors [1]. Others have argued that non-discriminatoryaccess
fosters the production of public and social goods [11]. But as
Evans’ argument suggests,and Apple’s ecosystem demonstrates, some
forms of discrimination with respect to the comple-mentors might
result in a platform that appeals to more users, and thus fosters
more productionof downstream goods. The potential complexity of the
MSP suggests that protection of comple-mentors and promotion of
downstream goods (including public and social goods) merit
distinctregulatory analysis with respect to discrimination.
With respect to complementors, ISPs impose some coarse
discrimination behavior today, viavolume discounts, which favor
large, entrenched complementors over new entrants. ISPs can
alsoimpose discrimination using deep packet inspection (DPI) to
distinguish and prioritize traffic, orlimiting a class of
application via software on an attached device.4 ISPs could also
offer discrim-inatory terms for physical interconnection to
complementor networks. The MSP model suggeststhat all forms of
potential discrimination imposed by the platform owner on their
complemen-tors should use one regulatory logic, as opposed to
viewing physical interconnection through onelens, DPI through
another, and so on. The concern is the business relationship, not
the technicalapproach to discrimination.
We are certainly not the first to argue that a multi-sided
analysis is appropriate to understandthe relationship between
complementors and users. Bourreau, Kourandi and Valletti [3] use
theconcept of the two-sided market to model the relationship
between content producers and retailcustomers. Their framing is
similar to ours, in that they are interested not just in pricing,
but in theinfluence of discrimination (or not) among the
complementors (in this specific model providersof free content
supported by advertising) on consumers, and the resulting
implications for theoverall ecosystem. They conclude that allowing
ISPs to offer enhanced QoS to complementors inexchange for payment
is welfare-enhancing. They also conclude from their model that it
may bein the interest of an ISP to degrade the basic best-effort
service, so that regulatory attention maybe required. Their work
models two competing ISPs; they cite earlier work that looks at a
singlemonopoly ISP. Sidak [20] has a similar analysis in which he
concludes that it is beneficial to allowISPs to charge content
providers for enhanced QoS.
3.2 Peering disputes and pricing analyses
In the last five years we have seen increasingly public debates
about whether peering betweennetworks should be revenue-neutral
(without financial settlements between peers) or whetherpaid
peering should reflect relative costs to ISPs of carrying traffic,
or even reflect manifestations ofrelative bargaining power. The MSP
model suggests that regulatory scrutiny of peering disputesshould
distinguish between two different circumstances: disputes among the
firms making up theplatform, or discrimination by platform
operators on complementors on the platform. A peeringdispute
between an ISP and a complementor should be subject to the same
sort of analysis as anyother form of discrimination imposed by an
ISP on a complementor.
With respect to peering disputes among firms that interconnect
to make up the Internet, suchevents are characteristic of what can
happen in any multi-firm platform. As described by Gawer [12],in
any multi-firm platform a powerful actor can dominate the creation
of the platform, or poten-tially even disrupt it by predatory
behavior. In particular, the argument is much weaker thatan ISP is
situated in an MSP when it negotiates terms for peering with other
ISPs than when itnegotiates with complementors who need access to
users.
4For example, ATT used a feature in the iPhone software to block
use of the FaceTime app for certain data plans.
Seehttp://arstechnica.com/apple/2013/01/att-continues-chipping-at-facetime-over-cellular-policy/.
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Peering disputes with complementors have gained more recent
attention, given the increasingnumber and size of complementors
seeking direct associations with access ISPs. Some accessISPs have
questioned the proper balance of pricing and discrimination between
a specific classof complementor (content distribution networks) and
users, arguing that distributors of contentshould pay for the right
to connect to the ISP’s customers [18]. This situation is a classic
example ofa pricing analysis in an MSP; previously, one class of
participant, the end-consumer, was coveringthe costs of the access
ISP; an alternative is to extract some of that revenue from another
classof participant. Although this move might signal the exercise
of market power by the ISP, Evansargues [10] that the presence of
market power does not affect the analysis of efficient pricing inan
MSP. Extraction of rents is an issue with market power, efficient
pricing is not. So, ignoringthe issue of market power, what are the
implications of shifting the balance of payments betweenusers and
complementors of the access ISP? It is unreasonable to assume that
the ISP could exerciseprecise first-degree price discrimination and
charge each complementor a price that reflects theirwillingness to
pay, given both its impracticality as well as the likely reaction
from the market andthe regulators. A more likely approach is for
the access ISP to charge complementors per bit ofdata generated by
the service, which might drive out of the market complementors with
low orunproven value. On the other hand, if this shift
significantly drove down the price charged tousers, more users
might enter the market.
We know of no fundamental principle that resolves this balance;
it calls for empirical datasuch as cost and price elasticity.
However, the complexity of the MSP landscape implies thatISPs
contemplating a shift in their negotiating position about
interconnection with complementorsshould not consider the shift
only as a new source of revenues. Even non-disciminatory
pricescharged to complementors, if high enough, could chill
innovation. Lower prices may benefitinnovation and public good
creation more than the total absence of discrimination, especially
inthe complementor market.
3.3 Discrimination with respect to retail users
As a preliminary to the rules promulgated in the Open Internet
Report and Order, and to frametheir regulatory objectives to
“ensure that broadband networks are widely deployed, open,
afford-able, and accessible to all consumers”, the FCC published
four principles [6]:
To encourage broadband deployment and preserve and promote the
open and inter-connected nature of the public Internet, consumers
are entitled to
• access the lawful Internet content of their choice.• run
applications and use services of their choice, subject to the needs
of law en-
forcement.• connect their choice of legal devices that do not
harm the network.• competition among network providers, application
and service providers, and
content providers.
The first two principles, without using the language or framing
of an MSP, in fact do a two-sided analysis, looking at the
consequences for the consumer (one class of participant) of
discrim-ination on another class (complementors–providers of
content and applications). The third prin-ciple directly protects
the user from one form of discrimination, and the fourth principles
offersa bit of wishful hoping that competition happen. But the only
direct protection of the user fromdiscrimination is that the
consumers can attach devices of their choice. There is no
requirementthat all potential users be served, or served at the
same price.
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In fact, ISPs today do discriminate with respect to what
consumers can do. One common lim-itation is that residential users
are not allowed to attach a “server” (device) to their network.
Thisrestriction might fall within the “reasonable network
management” exception on a cable systemwith limited upstream
capacity, but when Google imposed the same restriction on their
KansasCity service with abundant upstream capacity, they received
some criticism [21]. Another viewis that the the limited protection
given to the consumer by the four principles was
intentionallyconstructed to allow ISPs to stratify their users into
classes, e.g., residential vs. business.
With respect to pricing, most wireline ISPs do not
differentially charge users based on whatthey are doing. Rather,
they offer either flat pricing or usage caps. These billing models
are a formof discrimination: some customers with low usage support
those with higher usage. The benefitto this form of discrimination
is that for any individual user, the incremental cost of trying
somenew service from a complementor, or engaging in an activity
that generates mostly a public good(e.g. the user does not
appropriate the benefit) is zero. In contrast, wireless plans that
imposeusage caps and tiers may inhibit experimentation and
participation in activities where the valuethat accrues to the user
is (perceived to be) low.
3.4 MSP behavior in more mature markets
Another consequence of applying MSP theory relates to saturation
in one side of the market.According to MSP theory, when platforms
compete (as with IP vs. another protocol suite) in agrowing market,
innovation by complementors brings value to the platform owner in
the form ofnetwork effects that lead to success of the platform.
This dynamic applied in the early days of theInternet. But once the
platform (as an interface or standard) has achieved market
dominance, andespecially if the pool of users saturates, as it
seems to be doing for land-line broadband access, thelogic of the
MSP may cease to explain the benefit to the platform provider of
more complementors(i.e., apps). Indeed, with current wireline
pricing models that bring little or no additional revenueswith
additional usage, new complementors that drive increased usage
bring negative value to theplatform provider. Alternatively, usage
tiers may encourage investment in capacity, and thus theaddition of
new complementors, but at the same time discourage the use of these
complementsby cost-conscious users.
4 Shaping consistent regulation based on layered MSP model
Our repeating layer model captures the idea that a given actor
(e.g., an ISP) may produce manyplatforms as part of their system
design. We have focused on three platforms that appear (orare
likely) to be stable in the ecosystem: the global Internet, the
single-firm IP platform, and amulti-firm IP platform. We have also
explored how the theory of multi-sided platforms can shedfurther
light on the behavioral influences of and on platform owners,
complementors, and users.Since regulation attached to stable layers
would likely be more durable, we now consider how theframework of
platforms we have developed can help scope consistent policy and
regulation of theInternet. We examine three open issues and what
light platform theory sheds on them: one short-term regulatory
quagmire, one medium-term policy challenge, and one long-term
philosophicaldebate.
4.1 Consistent regulation of services on different IP-based
platforms
Regulators, when looking at the structure of the market, may
look at the overall behavior of firms,or at the desired qualities
of a platform. Put differently, when should a regulator consider a
plat-
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form in isolation, as opposed to considering a firm’s treatment
of several platforms. MSP theorysuggests an answer to this
question: platform layers merit a unified analysis if they serve
the sameclasses of participants. Whether the platform is
single-sided and serves one class of participants,or an MSP serves
multiple classes, if two platforms can serve the same classes then
they should beconsidered jointly. As a specific example, if an
access ISP offers its single-firm IP platform as an al-ternative
industry platform for (at least some) complementors to reach
consumers, the single-firmand global Internet platforms are
alternative means to serve the same classes of participants,
andmerit joint consideration. In contrast, an access ISP might use
its single-firm MPLS platform layerto offer an “Ethernet-over-MPLS”
service to allow a multi-site enterprise to connect its
varioussites; this type of enterprise constitutes a different class
of customer, and thus this platform meritsindependent consideration
from an MSP IP platform.
Note that joint consideration of platforms does not imply equal
treatment. The single-firm IPplatform as a industry platform for
complementors imposes extra burdens on potential comple-mentors: it
serves only complementors that arrange to connect directly to it.
If (as we describedearlier) multiple access ISPs interconnected
their single-firm IP platforms to build a second, multi-firm IP
industry platform that served the same set of user classes
(complementors and consumers)with the same implications for those
classes of participants, it would seem the two platformswould be
more likely to deserve similar regulatory treatment. Some
entanglement potentiallyarises between platforms if they serve some
but not all of the same participant classes. As in theXfinity Xbox
service (Section 2.1), an access ISP could use its internal
single-firm IP platform tooffer a video service to consumers (e.g.,
it could act as a reseller of video content over that plat-form),
which arguably competes with a video service offered by a
third-party complementor overthe global IP platform. The services
over the two platforms (single-firm IP and the Internet) havethe
retail user in common as a class of participants, but they do not
involve the same classes ofparticipants: with carrier IPTV, the ISP
is acting as a reseller of video programming, not as an MSP.Any
entanglement of regulatory consideration would derive from the fact
that services over bothplatforms offer competing and similar
offerings to one class of participants.
We observe that the FCC tried to address this situation by using
the term “specialized services”in the Open Internet Report &
Order [8]; a specialized service is any service that is not
burdenedwith the obligations of the report and order. Like many
other terms introduced to describe newbehaviors that do not fit
into the prevailing model of industry behavior, the term
“specialized ser-vices” brings little clarity to what is happening.
The FCC specifically identifies carrier IPTV as aspecialized
service (e.g., IPTV running over the single-firm IP platform of the
provider, althoughthey do not use this terminology or framing), but
the more general (and not yet resolved) questionis when to classify
a service as a specialized service. The FCC’s current position is
that the dis-tinction is determined by the set of machines
reachable via the service [8, para. 47]. Comcast, indescribing
their Xfinity IPTV service, stressed that the IPTV and Internet
service use different logi-cal slices of Comcast’s bandwidth
capacity.5 These sorts of distinctions do not seem useful as a
testof whether a service is running on the internal IP platform or
on the global Internet service. MSPtheory suggests that a more
fundamental and promising starting point for classification of
special-ized services is the degree to which the two services have
common classes of participants. Thus,carrier-provided IPTV is a
video reseller service that competes with services that
complementorsoffer over the global Internet. In an MSP-based
framework, the basic question is whether this typeof competition
between platforms should warrant any regulatory attention, not the
details of howcapacity is allocated or routing is restricted.
5See
http://corporate.comcast.com/comcast-voices/the-facts-about-xfinity-tv-and-xbox-360-comcast-is-not-prioritizing
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4.2 Regulating the platform itself rather than the platform
provider
The previous section described an approach to regulation in
which the regulator imposes require-ments on a firm, perhaps across
several platforms, to limit its behavior with respect to
variousclasses of its users, such as complementors. An alternative
is to regulate a specific platform, withthe goal of sufficiently
satisfying high-level social goals (e.g., high performance, low
cost, comple-mentor innovation) so that regulation of other
platforms of the firm is not required. Such platformregulation will
attempt to ensure that the player with power (the platform
provider) is workingfor the overall good of the ecosystem, but this
abstract policy statement leaves much unansweredabout the right
approach. We examine potential regulation of the global Internet
platform as aspecific case study.
The higher-level question remains: what goal might warrant
regulatory intervention? If thegoal is to drive healthy innovation,
then if the global Internet is “good enough” to stimulate
com-plementor innovation, it matters less what the provider does
with its single-firm IP platform. Inother words, the higher
performing and lower cost the global Internet offering, the lower
the reg-ulatory interest should be in activities on the single-firm
(or multi-firm) IP layer. (This approachraises the question of how
to define the minimum quality standards, which others have
alreadyrecognized as a potential anchor of future regulation [4,
5].)
The traditional discourse on network neutrality (and
specifically in the U.S., the FCC OpenInternet principles [6])
approaches this question primarily by constraints on the Internet
offeringitself. But the alternative platforms, particularly the
single and multi-firm IP platforms, increasethe degrees of freedom
both for an ISP and for the regulator. Any theory of regulation
that arguesfor limitation on the activities of the facilities owner
must take into account the degrees of freedomthat the platform
owner has. For example, imagine that a platform operator (broadband
provider)allocates a share of the IP platform as an alternate
multi-firm industry platform, which is IP-based,but not
interconnected with the public Internet. On that share, the
platform operator allows third-party complementors to offer
consumer-facing services, perhaps with superior qualities
comparedto the public Internet (e.g. QoS), or may curate the
available applications like the Apple app store.A theory of
regulation should be able to explain why this business behavior is
pro-innovationor anti-competitive, pro-consumer or not. The MSP
analysis can illuminate debate of these sortsof questions. It may
reveal, given the degrees of freedom to both actors, that a better
regulatoryapproach is to offer incentives to the ISP to improve the
global Internet platform, as we describeabove, rather than
constraining its operation.
4.3 Structural separation
Finally, we use our multi-sided platform model to describe and
compare options for a more radicalapproach to industry regulation.
In platform terms, structural separation is a requirement that
theowner of some platform be required to use it only for third-
party complementors, but not as aninternal platform for deploying
higher-level services. Structural separation is a extreme form
offacilities unbundling; in simple unbundling, the owner of the
platform must make it available toany comer on non-discriminatory
terms, but is also allowed to use it as an internal platform onthe
same terms.
As a real-world example, the British regulator has imposed
structural separation on the phys-ical layer platform of British
Telecom (BT). BT was required to establish a separate firm,
Open-Reach, to own and operate the actual copper pairs. In this
paper we have not emphasized theplatform represented by the
physical layer, but it is indeed another durable layer and thus a
rea-sonable target of regulation. However, several aspects of the
physical layer make it a challenging
15
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target of structural separation regulation. First, this layer is
very dependent on particular tech-nology choices. It is difficult
to imagine a technology-neutral form of structural separation at
thephysical layer. Second, using copper pairs as an example, there
is no simple way to share a cop-per pair between two complementors.
A given consumer will pick among competing providersof higher-level
services, but then must obtain all services from that one provider.
The resultingmarket structure would seem to limit competition among
complementors.
Imposing a separation point at a higher-level platform would
allow more flexibility in theresulting market structure. In
particular, separation at a layer that allows multiplexing
amongmultiple complementors (e.g., a packet-switched platform)
could allow multiple complementorsto offer services to the same
customer. The packet level could be the single-firm IP platform, or
alower-level platform such as an ATM platform. Our emphasis on
finding durable platform layersaround which to regulate implies
that structural separation of an intermediate layer (between
thephysical and the single-firm IP platform) would be most likely
to succeed if the platform whereseparation was imposed was defined
in a technology-independent way, and thus could apply toa range of
alternative technologies that will be found in those layers over
time.
We are not advocating structural separation; just framing it in
terms of our model. But thetools of MSP and multi-platform analysis
could help to answer the question in any debate overstructural
separation: what are the implications for the platform owner and
the larger ecosystemif the owner were precluded from using it as an
internal platform.
5 Conclusions
We have presented a model that characterizes both the layered
platform architecture of today’scommunications technology, and
aspects of interconnection among firms to produce what wehave
identified as the global Internet and its connected complementors.
We have identified threespecific IP-based platforms as important:
the single-firm IP platform, the global Internet, and amulti-firm
private IP platform. These platform layers will be more stable
fixtures of the infras-tructure than other layers beneath or above
them, and thus a focus on these specific layers willhelp produce
policy that is durable in the face of evolving business and
technology. Distinguish-ing the three is necessary in any realistic
regulatory or business analysis. With respect to issuesrelated to
interconnection, we argue that distinguishing between the role of
multi-firm productionand complementor interconnection is a
fundamental criterion. Peering among firms that make upthe global
Internet raises different issues than interconnection between a
complementor and theInternet.
Our model suggests opportunities for discrimination on
multi-sided platforms, both with re-spect to users and to
complementors. These include pricing discrimination (some of which
we seetoday, such as volume discounts and flat rate pricing),
discrimination in interconnection policy,and manipulation of
traffic flows based on their characteristics, including which users
or whichcomplementors generate the traffic. In trying to understand
which of these behaviors should betreated together rather than
separately, we argue that with respect to a particular platform,
allforms of discrimination with respect to a given class of
participant (e.g., a complementor) shouldbe analyzed using the same
framework, as opposed to looking at (for example)
interconnectionusing one framework and deep packet inspection using
another. With respect to the questionof whether behavior on
different platforms should be evaluated independently or in
common,we argue that a starting point is to determine the extent
the two platforms serve the same set ofparticipants.
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